British Airways is virtually giving away its loss-making regional airline, BA Connect, to low-cost carrier Flybe in a move that may lead to hundreds of job losses. Just seven months after the operation was rebranded and given two years to return to profit, BA announced yesterday that it had reached "agreement in principle" for a deal with Flybe.

BA has written down the value of Connect, which operates between cities in the UK, by £106m to about £54m. The operation made a £20m loss last year and a £6m deficit in the first half of this year.

There was confusion, with advisers from both sides saying that each company received a cash payment under the agreement. But as one analyst said yesterday: "If money did change hands, it will not have been much."

BA will get a potentially lucrative 15pc stake in Flybe, which has postponed an intention to float next year until it has digested Connect. Jim French, Flybe's chairman and chief executive, said it was possible that the airline would seek a listing in 2008.

Willie Walsh, BA's chief executive, said there was no arrangement for the 15pc stake should Flybe not float. "This is a long-term investment," he said.

When Flybe announced last year that it intended to float, analysts put a £150m-£200m value on the business, although these number will change substantially if the Connect deal is a success.

Connect, based in Manchester, employs 1,900 staff. The airline is expected to carry 3.5m passengers on regional services this year. Flybe, based in Exeter, employs 1,800 staff and operates 101 routes from 21 UK regional airports. It is expected to carry 6m passengers this year.

Job cuts, possibly hundreds, are likely, Mr French admitted. "We are still doing some due diligence and still negotiating," he said. "We are doubling the size of our business and there will be job losses."

Connect's profitable operation from London City Airport, and services between Manchester and New York, are not part of the deal. The regional ground-handling business is also not included.

Mr Walsh said: "Point-to-point regional operations are not a strategic part of our business. Such activities are better undertaken by a regional low cost airline. Despite the best efforts of the BA Connect team, we do not see any prospect of profitability in its current form. The proposed sale to Flybe provides the best opportunity to secure the long-term future for the many dedicated staff."

He said the Connect employee pensions were unaffected. "We are funding their pension. The whole bill is being picked up by BA."

Flybe is 81pc-owned by Jersey-based Rosedale, one of the family trusts set up by the late Jack Walker, a steel millionaire who also bankrolled Blackburn Rovers football team. Mr French holds 9pc, and 10pc is held by an employee trust.